MONETARY POLICY IN IRAQ Current Developments - iraq …

1 MONETARY POLICY IN iraq . Current Developments CENTRAL BANK OF iraq . January 2010. 1- MONETARY POLICY from dependence to independence development of Central Banking in iraq The original Iraqi National Bank was established in 1947 with a capital of ID million It was the nucleus of the Iraqi Central Bank established according to law 72 of 1956. MONETARY POLICY was constricted by two factors in the past five decades: The rentier nature of the Iraqi economy The effect of fiscal POLICY Thus money supply was linked to government expenditures. But coordination between MONETARY and fiscal POLICY remained weak. In 1964 the authorities reduced the role of the private sector, commercial, industrial and banking. Commercial bank transactions were concentrated, till 1980's in one government bank, Rafidain. Later on another government bank was established, Alrasheed In 1991 licenses were given to establish private banks During this period, the 1990's, narrow money supply increased from ID billion to ID.

2 Trillion in March 2008. The rate of exchange declined from 4 ID to the dollar to 1216 ID in April 2008. Inflation increased from in 1990 (1993=. 100) to approach hyper-inflation during the 1990's which is the period of sanctions Government expenditures increased from ID billion to Trillion in Dec. 2007. 2- MONETARY POLICY in iraq : Current trends and challenges Annual inflation rate was about in April 2008. Unemployment reached about 50%. during recent years. The real sector experienced a decline in productivity. Negative interest rate incited people to hold foreign currency giving rise to MONETARY substitution (dollarization). Industrial and agricultural production have experienced a serious decline. 3- The Iraqi financial sector: some salient features: MONETARY POLICY aims at deepening the MONETARY sector given that: The percentage of the lent credit to GDP. was only about 7% during 2007. Private sector contribution to lending does not exceed 24% and the rest is extended by government banks.

3 Spread is 8 percent signifying weakness in intermediation. Central Bank independence and tendency for modernization The new law No. 56 of 2004 gave the bank its independence. CBI does not receive instructions from government For the Iraqi Banking sector to perform its functions, the MONETARY authority undertook the following tasks: A new currency was put into circulation, end of 2003. Liberalization of financial sector especially interest rate. Foreign Banks were allowed to operate in iraq . Rescheduling of domestic debt owed by the MOF, around ID Trillion DMFAS has been used (Debt Management and Financial analysis system). Modernization of the payment system (RTGS). Reserve management 4 - MONETARY POLICY employed the following rules to generate stability in the financial market. 1. Daily foreign Currency Auctions. CBI built respectable level of reserves $44 Billion December 2009. 2. Standing Facilities. This is to control liquidity in two ways, - Lending: Primary, Secondary and the last resort.

4 - Deposits in Dinar and Dollars. 3. Legal reserve requirements: 25% deposits for the private sector and 75% for Government sector since July 2007 to be modified as required. 4 Surplus banking reserves. To monitor and control liquidity. Payment Systems : - This is done in cooperation with the IMF. and WB. - A separate department was created. Liquidity Management POLICY Option - Treasury Bill Auctions for 91 days, 63. days and 28 days. - Inter Bank lending 4 Current Trends in MONETARY POLICY - Exchange rate appreciation because of inflation. - Adjusting the POLICY rate. Raising the rate because of inflation Reducing the rate because of decline in inflation 5 - New Developments in POLICY Inflation declined to 7% after being 50%. POLICY rate was lowered to 9%. Funds moved from CB to market Having moved from market to CB under inflation Now more attention is paid to growth POLICY and watching closely development in inflatio